Budgeting and Spending
Creating a working household budget is the first step toward successful financial planning. It is important to understand what you are spending your money on and how much you would ideally like to spend on both necessary and discretionary items. By bringing your spending under control, you will free up cash flow that can be channeled toward meeting your long-term goals, such as becoming debt-free, purchasing a home, saving for retirement or starting a business.
Only after you get your spending under control can you safely take on debt. Credit is an important financial tool, but it also wields great risk. Managing debt wisely is part of living within your means.
I want to create a budget. Where do I begin?
Start by identifying your biggest outlays. While whittling down your discretionary spending is useful, your major fixed expenses are the ones most likely to cause you serious problems. It may be in these areas where you can make dramatic cutbacks-or at least plan for inevitabilities in the future.
- Your home. Too many families overextend their finances by taking on too big a mortgage. The more expensive your house the higher your property taxes and insurance premiums and the greater your utility and maintenance costs. Most experts agree that your total housing expenses should represent no more than 25 percent of your income. If you fail to make your monthly payments, a foreclosure or delinquencies could devastate your financial future.
- Your car. Do not stretch to take on a bigger car payment than you can afford. You never want to owe more on your car than it is worth. Otherwise, you will owe money on the loan if you sell it.
I cannot get a handle on my day-to-day spending. What can I do?
Your first step is to figure out exactly how much you spend on a monthly basis. You need to create an expense record. For a few months, write down every single thing you spend money on-no matter how small the amount.
Next, list all your expenses under categories such as the following:
- housing-mortgage or rent, property tax, home insurance, utilities, telephone, cable, Internet access, cleaning, maintenance and repairs
- car-insurance, gas, maintenance, repairs, parking and tolls
- food-groceries and restaurant meals
- clothing-apparel, accessories, laundry and dry cleaning
- health care-insurance, medications and out-of-pocket expenses.
- personal-entertainment, gifts, toiletries and cosmetics and health club memberships
- children-day care, clothing, school expenses and entertainment
- travel
- taxes
- savings
Add up the expenses for each category and decide how to distribute seasonal expenses throughout the year. From there, you can project how much you need to spend every month and compare it to your income. Look for areas you can reasonably cut back on. If you try to sacrifice too much, you might not stick to your budget. Stay motivated by concentrating on what you stand to gain by sticking to your budget. Focus on your goals, not on your sacrifices.
TIP: There are three areas where most people can generate a great deal of savings. Try to get better rates on your insurance policies and consider increasing the deductibles. Pay off your credit cards and keep all the money you have been spending on high interest. Contribute to your company's 401(k) plan and flexible spending accounts with pretax money.
What is the best thing to do with the extra money I am saving?
If you do not already have one, create an emergency fund. You should have several months' worth of expenses saved in an accessible cash account. If a temporary crisis occurs, such as losing your job, you will have enough money to keep you afloat without having to turn to high-interest credit cards to pay for expenses.